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”Good investing does not involve trading”
- Some Finnish Hillbilly
Warren Buffett’s wisdoms about investing
1. Focus investing: if you know the succesful businesses why would you want to diversify to other businesses instead of buying more of the proven – successful – ones, when the price is right
2. Studies have shown that keeping the yearly turnover low of companies in your portfolio is best kept to minimum, 0-20%, which means that if you own 20 companies, you could change 2 of them yearly. Changing companies often only benefits the stockbroker and the government (taxes).
3. Buffett sees a low cost index fund better than active Wall Street traders, because index funds that don’t pay out dividends act like Berkshire Hathaway in a way that they get compound interest and only pay taxes if the companies are sold. Buffett loves dividends but he loves even more companies that are able to develop their operating profits year after year. The difference of paying out dividends every year instead of after a long period, 30 years is huge.
4. Patience, holding on to a good company increases the chances of success. Nobel prize mathematician asked his colleague in the 60s whether he would be willing to make a bet where they would toss a coin and if his friend would win he would receive 20 USD and if he would lose he would have to pay 10 dollars. His friend had answered, let me think about it and after awhile returned back and answered, I will accept your offer if we can repeat the toss of the coin 100 times.
5. Probability when thinking about investing Buffett thinks about probabilities. There is a 50% chance that a company will earn 10 dollars in 10 years next year but there is a probability of 50% that the company will lose 5 dollars. Is it smart to invest? From 10 dollars one would need to pay taxes amounting to 3 dollars leaving one 7 dollars. Now the odds are 50/50 that you receive either 7 dollars or make a loss of 5 dollars. One would be better of having the money in a bank account with a 2 dollar interest rate because making a 2 dollar profit with 100% certainty is much better than having a 50% chance of losing the investment.
6. Patience and probability In horse racing you can bet on the good horse but the payout ratio is only 3:2 and for the worst horse that never wins the payout ratio is 100:1. What would Buffett bet on? He would not bet at all, he would wait until the good horse comes to the post with inviting odds.
7. Wall Street investors are not investors at all, they are speculators that aim for quarterly profits. Every quarter the Wall Street Journal lists the best performing funds instead of the long-term ones. The investors follow the masses because like Lemmings collective stupidity does not destroy one’s image (which means losing your customers) and it is easier to be wrong together.
8. When choosing companies forget your brain’s fast (lazy) thinking and switch to slow thinking (Kahnemann). Buffett answers many questions* (see the questions below) before investing and only at the last stage of the thinking selection process compares the share price on the market to what he evaluates the intrinsic value to be, if the share price is 20% lower than the intrinsic value he invests.
9. Buffett wants to find outstanding companies with moderate pricing, the companies business models - how they earn money - need to be understood, the company needs to have a competitive advantage, the management needs to know how to operate with loss costs
Biografi
”Good investing does not involve trading”
- Some Finnish Hillbilly
Warren Buffett’s wisdoms about investing
1. Focus investing: if you know the succesful businesses why would you want to diversify to other businesses instead of buying more of the proven – successful – ones, when the price is right
2. Studies have shown that keeping the yearly turnover low of companies in your portfolio is best kept to minimum, 0-20%, which means that if you own 20 companies, you could change 2 of them yearly. Changing companies often only benefits the stockbroker and the government (taxes).
3. Buffett sees a low cost index fund better than active Wall Street traders, because index funds that don’t pay out dividends act like Berkshire Hathaway in a way that they get compound interest and only pay taxes if the companies are sold. Buffett loves dividends but he loves even more companies that are able to develop their operating profits year after year. The difference of paying out dividends every year instead of after a long period, 30 years is huge.
4. Patience, holding on to a good company increases the chances of success. Nobel prize mathematician asked his colleague in the 60s whether he would be willing to make a bet where they would toss a coin and if his friend would win he would receive 20 USD and if he would lose he would have to pay 10 dollars. His friend had answered, let me think about it and after awhile returned back and answered, I will accept your offer if we can repeat the toss of the coin 100 times.
5. Probability when thinking about investing Buffett thinks about probabilities. There is a 50% chance that a company will earn 10 dollars in 10 years next year but there is a probability of 50% that the company will lose 5 dollars. Is it smart to invest? From 10 dollars one would need to pay taxes amounting to 3 dollars leaving one 7 dollars. Now the odds are 50/50 that you receive either 7 dollars or make a loss of 5 dollars. One would be better of having the money in a bank account with a 2 dollar interest rate because making a 2 dollar profit with 100% certainty is much better than having a 50% chance of losing the investment.
6. Patience and probability In horse racing you can bet on the good horse but the payout ratio is only 3:2 and for the worst horse that never wins the payout ratio is 100:1. What would Buffett bet on? He would not bet at all, he would wait until the good horse comes to the post with inviting odds.
7. Wall Street investors are not investors at all, they are speculators that aim for quarterly profits. Every quarter the Wall Street Journal lists the best performing funds instead of the long-term ones. The investors follow the masses because like Lemmings collective stupidity does not destroy one’s image (which means losing your customers) and it is easier to be wrong together.
8. When choosing companies forget your brain’s fast (lazy) thinking and switch to slow thinking (Kahnemann). Buffett answers many questions* (see the questions below) before investing and only at the last stage of the thinking selection process compares the share price on the market to what he evaluates the intrinsic value to be, if the share price is 20% lower than the intrinsic value he invests.
9. Buffett wants to find outstanding companies with moderate pricing, the companies business models - how they earn money - need to be understood, the company needs to have a competitive advantage, the management needs to know how to operate with loss costs
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